S&P Lowers Swiss Re Ratings; Raises ERC, GE Re, GEIS

Standard & Poor’s Ratings Services has lowered its long-term counterparty credit and insurer financial strength ratings on Swiss Reinsurance Co. and its core entities to “AA-” from “AA” following the closure of its acquisition GE Insurance Solutions Corp. (GEIS) (See IJ Website June 12).

The announcement from S&P’s London office departed from the “wait and see” attitude adopted by A.M. Best Co. and Fitch Ratings (See following article). They both kept Swiss Re under review with negative implications, and GEIS on review, but with a positive slant.

In contrast S&P raised its long-term counterparty credit and insurer financial strength ratings on Employers Reinsurance Corp. and GE Reinsurance Corp. to “A+” from “A”, and its long-term counterparty credit and senior unsecured debt ratings on GEIS to “A-” from “BBB+.” Concurrently, S&P removed all of the ratings from its CreditWatch, where they had been placed with various implications on Nov. 18, 2005. The outlook on all these entities is stable.

Concerning various subsidiaries of GEIS acquired by Swiss Re – GE Frankona Reinsurance Ltd., GE Frankona Rückversicherungs Aktiengesellschaft, Coregis Insurance Co., GE ERC Strategic Reinsurance Ltd., GE Frankona Reinsurance A/S, Luxembourg European Reinsurance S.A., and Westport Insurance Corp. – S&P said their ratings will remain on its CreditWatch with developing implications, where they were placed on May 26, 2006.

“The downgrade of the Swiss Re entities reflects the execution risks associated with integrating a group of the size and complexity of GEIS. There are significant integration challenges, given the size and complexity of GEIS and the state of flux that it has been in for a number of years caused by the uncertainty over the long-term ownership of the group,” explained S&P credit analyst Simon Marshall.

“These risks are partly offset, however, by Swiss Re’s track record of successful transatlantic acquisitions and the advanced integration already in place,” he added.

S&P said the “upgrade of Employers Reinsurance Corp. and GE Reinsurance Corp. reflects the companies’ position as strategically important subsidiaries of Swiss Re. The raising of the counterparty credit and senior unsecured debt ratings on GEIS reflects Swiss Re’s assumption of GEIS’ debt as part of the transaction.” S&P expects Swiss Re to honor this debt.

Commenting on Swiss Re’s ratings, S&P said they “reflect its very strong competitive position, very strong financial flexibility (defined as the ability to source capital relative to requirements), and very strong capitalization.” The rating agency added, however, that these “factors are partly offset by historical operating performance, which, while strong, is not consistent with the ratings or with the group’s very strong competitive position. Execution risk arising from the integration of GEIS’ operations is also a negative.”

S&P explained that the stable outlook on Swiss Re and its core entities reflects its expectation that “combined ratios for the group will be less than 100 percent in 2006-2008 and ROE will be about 11 percent in 2006 and about 13 percent in 2007 and 2008. For 2006 and 2007, total (life and non-life) ROR of about 10 percent and non-life ROR exceeding 10 percent are expected. The ROR for life business is expected to be about 9 percent. Other expectations are that capital adequacy as measured by Standard & Poor’s risk-based model would remain very strong.”

S&P also noted that a revision of its outlook on Swiss Re and its core subsidiaries to positive “is possible in the event that GEIS is quickly and successfully integrated, with key staff retained and cost synergies emerging at least as forecast. Such an outcome would also be dependent on the group’s operating performance improving to a very strong level.”

Maintaining its more or less optimistic view of Swiss Re’s ability to successfully absorb GEIS, S&P said a “negative outlook is unlikely, however, and would be driven by concerns over operating performance.” It added that the outlook on Employers Reinsurance Corp., GE Reinsurance Corp., and GEIS could be revised to positive if these companies moved toward core status.” However, S&P warned that a “negative outlook is possible if these companies were no longer classed as strategically important to Swiss Re.”

S&P said it “will evaluate the stand-alone characteristics of the entities remaining on CreditWatch within the context of their new roles within the Swiss Re group, their strategic importance to Swiss Re, and any new implicit or explicit support arrangements Swiss Re may provide to them in the future. The current CreditWatch developing status of these subsidiaries reflects the fact that, depending on the outcome of this analysis, Standard & Poor’s will affirm, lower, or raise the ratings on each entity within the next two to three months.”